Chapter 2 Forms of Business Ownership

Answers to Think It Over

1 If Mr Chan has sufficient capital and experience to run a pizza restaurant and he is willing to
assume all the risks, he should choose a sole proprietorship.

2 The advantages are:

• Simple set-up procedures
• Low set-up cost
• Efficient and flexible operation
• Close relationship with customers and employees
• Easy transfer of ownership
• No need to be bound by the decisions of others

3 If Mr Chan does not have sufficient capital and experience and wants to share the risk with
someone, it would be better to get a partner who can provide additional capital and
experience.

4 If Mr Chan wants to run the restaurant alone, he can borrow money from family members and
friends. If he prefers to run the business with partners, he can invite other people to become
partners and provide capital. He can also obtain a loan from financial institutions (e.g., finance
company).

5 The franchisor will help Mr Chan set up the business and provide him with a wide range of
support (marketing, inventory supplies, accounting and management) to operate the business.
Mr Chan would be subject to less risk because the franchise is already an established brand
name. He can also enjoy the benefits of a larger business, such as lower costs when buying
supplies in bulk.

Answers to Check Your Progress

Q2-1 A sole proprietorship is not a legal entity. This means that the business has no separate
legal existence from its owners. The business cannot own properties, engage in lawsuits
and make contracts in its own name.

Q2-2 C
Q2-3 A
Q2-4 B
Q2-5 D
Q2-7 D

NSS BAFS: Business Environment and Introduction to 11 © Pearson Education Asia Limited 2014
Management 2nd Edition: Answers to Textbook Exercises
Q2-8
(a) Number (b) Sources (c) Efficiency in
of owners of capital running the business
Sole proprietorship 1 Less More efficient
Partnership At least two More Less efficient

Q2-9 B
Q2-10 C

Q2-12 Advantages are:

 A private limited company has limited liability. The owner can thus avoid the loss of
personal assets if the business fails.
 A private limited company is a separate legal entity and is therefore independent of its
owners. The company can have continuity and its future is no longer threatened by the
illness or death of the owner.
 As a private limited company can raise capital by issuing shares, it can have more
sources of capital. In general, it is easier for a private limited company to raise capital
when compared with a sole proprietorship. More capital can lead to further and better
development of the business.
 Due to more sources of capital, the size of the business of a private limited company is
usually larger. The company can thus operate on a larger scale.

Disadvantages are:
 Setting up a limited company is complicated because more documents are required for
registration when compared with a sole proprietorship.
 When compared with a sole proprietorship, a private limited company needs to pay a
higher rate of profits tax.
 The structure of a private limited company may be so large and complex that the
process of decision-making takes much time, resulting in a lack of efficiency.

Q2-13 D

Q2-14 Advantages of a public limited company over a private limited company include:
 Its creditworthiness is higher than that of a private limited company. It is easier for a
public limited company to obtain loans from banks and make purchases on credit.
 If the company becomes a listed company, more capital can be raised by issuing
shares on the stock market.
 As the ownership of a public limited company is separated from management, the
company can hire specialists to improve its efficiency.

NSS BAFS: Business Environment and Introduction to 12 © Pearson Education Asia Limited 2014
Management 2nd Edition: Answers to Textbook Exercises
 (Any two of the above)

Q2-15 B

Q2-16 Most hi-tech companies do not like to engage in joint ventures for fear that their
technology may be stolen by their partner firms.

Q2-17 D
Q2-19 D
Q2-20 B

Q2-21 This is because public corporations can be run more efficiently than government
departments. Public corporations are self-financing and operate on a commercial basis.

Q2-22 B

Q2-23 MNCs contribute to the economy of developing countries by bringing in capital,

knowledge and technology. They also provide employment to local workers and
management training to local managers.

Answers to Try This Activity

A2-1 Key information may include:
 Share certificate number
 Name of the corporation
 Name of the stockholder
 Type of shares
 Number of shares
 Corporate logo
 Date of issuance

A2-2 Free answer

A2-3 Free answer
A2-4 Free answer
A2-5 Free answer

A2-6 Arguments for:

 Public corporations can provide services to people in a more efficient manner (as they
operate on a commercial basis).
 Public corporations are self-financing. This gives them a great incentive to operate

NSS BAFS: Business Environment and Introduction to 13 © Pearson Education Asia Limited 2014
Management 2nd Edition: Answers to Textbook Exercises
 more efficiently and provide people with better services.
 Taxpayers bear the losses that result when government departments provide public
services to the general public.

Arguments against:
 Government departments can ensure that the general public receives essential goods
and services at subsidised prices. This is because the objective of government
departments is not profit making. They are financed by the government.
 The government should be responsible for providing public services to people in need.
If public corporations provide all of the public services, they might neglect the needs
of the minority as they operate on a commercial basis.
 Government departments can be efficient as well. The government can take the
initiative to make changes to government departments, e.g., outsourcing services,
setting up trading funds and simplifying the administration structure.

A2-7 Free answer

A2-8 Free answer

Answers to Discussion Questions

1 As a local company, Dairy Farm understands the market situation in Hong Kong. Moreover, it
has a good working relationship with companies in Hong Kong. This can help the head office
of 7-Eleven develop its business in Hong Kong.

2 Dairy Farm provides franchisees with training in shop operations, computerised product
systems and sales strategy. The company also provides other types of support to franchisees,
including store equipment, product merchandising and sales promotion.

3 7-Eleven’s sales strategy improvements include:

• Product diversification, for example, selling microwaved food, cooked food, bread,
stamps, phone cards and Ocean Park tickets
• Service diversification, for example, collecting and dispatching goods for designated
courier companies, mobile phone battery recharging, adding value to Octopus cards and
bill payment

4 Disadvantages of running a 7-Eleven franchised store are:

• Franchisees may not have enough independence in operating the business.
• Franchisees may depend heavily on the support of the franchisor.
• Franchisees need to pay royalties, management and promotional fees to the franchisor
whether a profit is earned or not.
• Franchisees may lack flexibility in the operation of the shop and cannot respond to market

NSS BAFS: Business Environment and Introduction to 14 © Pearson Education Asia Limited 2014
Management 2nd Edition: Answers to Textbook Exercises
 changes quickly.
(Any two of the above)

Answers to Assessment
MCQ
2.1 D
2.2 A
2.3 C
2.4 C
2.5 B
2.6 B
2.7 A
2.8 D
2.9 A
2.10 A
2.11 C
2.12 A
2.13 D
2.14 B
2.15 D
2.16 B
2.17 D
2.18 C
2.19 A
2.20 C

Short Questions
2.21 Companies that form a joint venture usually possess different types of assets, technologies,
knowledge and expertise. (2 marks)
They can create better products when they pool their resources together. (1 mark)

2.22 The reasons are:

 Little capital is required to set up a sole proprietorship.
 The set-up procedure of a sole proprietorship is simple.
 The profits tax rate of a sole proprietorship is low (when compared with a limited
company).
 The owner can easily transfer the ownership to others.
 The owner can enjoy autonomy in running the business. He is not bound by the decisions
of others.
(Any three of the above, 2 marks for each point)

NSS BAFS: Business Environment and Introduction to 15 © Pearson Education Asia Limited 2014
Management 2nd Edition: Answers to Textbook Exercises
2.23 The differences between a general partner and a limited partner include:
 A general partner has unlimited liability whereas a limited partner has limited liability.
(2 marks)
 A general partner takes part in the management of the business whereas a limited partner
does not take part in the management of the business. (2 marks)

2.24 Public enterprises usually provide essential goods and services to the general public at
subsidised prices. (1 mark)
They help satisfy the basic needs of poor people, and this can help narrow the income gap
between the rich and the poor. (2 marks)

2.25 Advantages of a sole proprietorship over a partnership include:

 A sole proprietor can make decisions quickly according to changes in market demand.
The operation of a sole proprietor is more efficient and flexible.
 A sole proprietor can easily transfer the ownership of the business to others.
 A sole proprietor can make decisions himself. He is not bound by the decisions of others.
 The scale of a sole proprietorship is usually smaller than a partnership. Therefore, a sole
proprietor can maintain a good relationship with his customers and employees more
easily.
(Any two of the above, 2 marks for each point)

2.26 A business prefers to be a private limited company rather than a public limited company
because
 a private limited company does not need to disclose the company’s financial information
to the public.
 shareholders have better control of the company because shares are not traded freely.
 accounting costs in preparing financial statements are lower.
 the legal and administrative procedures for forming a private limited company are less
complex and costly.
(Any two of the above, 2 marks for each point)

2.27 Shares cannot be easily transferred in a private limited company. If shareholders wish to sell
their shares, they may be required to first offer them to the existing shareholders of the
company. Otherwise, the board of directors has the power to refuse to register share transfers.
The shares of a private limited company cannot be sold on the stock market. (2 marks)
On the other hand, shares of a public limited company can be easily transferred. They are
easily bought and sold on the stock exchange. (2 marks)

2.28 As the sole proprietor keeps all of the profits and bears all the losses, there is a greater

NSS BAFS: Business Environment and Introduction to 16 © Pearson Education Asia Limited 2014
Management 2nd Edition: Answers to Textbook Exercises
 incentive to work hard. (2 marks)
Also, as the owner can make decisions quickly and independently according to changes in
market demand, operations are more efficient and flexible. (2 marks)

2.29 Differences between private enterprises and public enterprises include:

 Private enterprises are owned by private individuals but public enterprises are owned by
the government.
 Private enterprises’ main objective is to make a profit. Public enterprises aim to provide
essential services or goods to the public at subsidised prices rather than making a profit.
 Private enterprises obtain capital from their owners or by borrowing from banks. Public
enterprises are financed by the government.
 Private enterprises close down if they do not make a profit. Public enterprises never close
down.
(Any three of the above, 2 marks for each point)

2.30 Differences between preference shareholders and ordinary shareholders include:

 Ordinary shareholders earn more dividends when the company earns more profits.
Dividends on preference shares are fixed and guaranteed. (2 marks)
 Ordinary shareholders have voting rights at the annual general meeting and can elect a
board of directors to run the company. However, preference shareholders do not have
voting rights. (2 marks)
 Preference shareholders receive dividends before ordinary shareholders are paid.
(2 marks)

2.31 Advantages of operating a store by joining a franchise include:

 Goodwill that has been built up among customers because the company’s products are
well-known.
 Assistance by the franchisor in setting up the business.
 Obtaining support from the franchisor in terms of marketing, inventory supplies,
accounting and management.
 Enjoying the benefits that large companies receive, such as lower costs from bulk
purchases.
 A management system that quickly helps establish goodwill.
(Any three of the above, 2 marks for each point)

2.32 The type of business ownership that best suits a grocery is sole proprietorship. This is
because: (1 mark)
 It is easier to set up. (Simple set-up procedure)
 The set-up cost is low.
 The scale of a grocery store is usually small.

NSS BAFS: Business Environment and Introduction to 17 © Pearson Education Asia Limited 2014
Management 2nd Edition: Answers to Textbook Exercises
  The profits tax rate is lower when compared with that for a limited company.
 There is no need to be bound by the decisions of others. Efficient and flexible operations
allow the business to respond quickly to market changes.
 The relationship with customers and employees can be close.
 The owner can easily transfer ownership of the business to others.
(Any three of the above, 2 marks for each point)

2.33 The advantages for the foreign fashion company of forming a joint venture with a local
company are:
 The local company can provide local market information to the US fashion company.
 The local company can help the US fashion company set up its business in the Mainland
of China.
 The local company can help the US fashion company establish a working relationship
with local companies, such as suppliers.
 The local company can help the US fashion company meet the Chinese government’s
requirements for doing business in the Mainland of China.
 The local company can provide an established distribution channel for the company’s
products.
(Any three of the above, 2 marks for each point)

2.34 The reasons for franchise stores to have standardised products and operations are as follows:
 They can enjoy the benefits of a large shop when they buy the stock in bulk. This can
lower the product cost. (2 marks)
 Franchisors need to monitor the operation of the franchised shops on a regular basis.
Standardised operation can ease the management of franchisors. (2 marks)
 Customers might be familiar with the standardised products of a franchise shop. This can
help attract customers. (2 marks)
(Any other reasonable answers)

2.35 a Government departments receive capital from the government. Public corporations are
financially independent of the government, except for the initial capital investment. They
are self-financing and operate on a commercial basis. Hence, they raise capital by their
own means. (2 marks)
b Government departments are run by the government. Public corporations have a separate
legal existence. The government does not participate in the daily running of these
businesses but has supervisory control over them. (2 marks)
c Government departments are mostly inefficient because of the lack of direct competition
and their complicated and slow decision-making processes. Public corporations are self-
financing and run on a commercial basis. They are more efficient than government
departments. (2 marks)

NSS BAFS: Business Environment and Introduction to 18 © Pearson Education Asia Limited 2014
Management 2nd Edition: Answers to Textbook Exercises
Application Problems
2.36 a Advantages for Mr Chan and Miss Wong in forming a partnership include:
 It is easy to set up a partnership.
 Partners can pool their resources and specialised knowledge and ability.
 Compared with a sole proprietorship, more capital will be available from partners.
 The profits tax rate for a partnership is lower than that for a limited company.
 The scale of a partnership is usually small and it is easier to attract employees as
they may have a better chance of promotion.
 The business risk is borne by several partners.
(Any three of the above, 2 marks for each point)

b In a general partnership, all the partners are general partners with unlimited liability.
(1 mark)
Mr Chan and Miss Wong have unlimited liability. If the business fails, they may lose not
only the business but also all of their personal possessions. (2 marks)

c If Mr Chan dies, the business has to shut down. (1 mark)

2.37 a Advantages for Ms To, Ms Pang and Mr Ng of forming a limited company include:
 They enjoy limited liability and can thus avoid the loss of their personal assets.
 The company can issue shares, so it is easier to raise capital.
 Banks are more likely to give loans to limited companies.
 A limited company is a separate legal entity. The company’s future is not
threatened by the illness or death of its owners.
 The business can operate on a larger scale since it has more sources of capital.
(Any two of the above, 2 marks for each point)

b To leave the private limited company, Ms Pang can sell her shares. But before selling her
shares to others, she would have to first offer her shares to Ms To and Mr Ng. (2 marks)

c Mr Leung can ask the existing shareholders (i.e., Ms To, Ms Pang and Mr Ng) to sell him
their shares of the company. (2 marks)
However, the transfer of shares has to be approved by the company’s board of directors.
(2 marks)

2.38 a The two criteria are:

 Network: Does the local partner have a good social network or distribution network
in Shanghai?

NSS BAFS: Business Environment and Introduction to 19 © Pearson Education Asia Limited 2014
Management 2nd Edition: Answers to Textbook Exercises
  Human resources: Does the local partner have the human resources to manage the
new stores?
 Working culture: Can the local partner work with the Italian ice-cream chain?
 Business ethics: Will the local partner disclose the business secrets (formula of the
Italian ice-cream) to others?
(Any two of the above, 2 mark for each point)
(Any other reasonable answers)

b The disadvantages are:
 Disagreement among partners: Rainbow Limited may have disputes about how to
manage the business with the Mainland company. This can affect the operation and
performance of the joint venture. (2 marks)
 Leaking of information: As the partners in a joint venture have to communicate
with each other frequently, Rainbow Limited’s product information (e.g., the
formula of the Italian ice-cream) may be leaked to the Mainland company.
(2 marks)
 Loss of autonomy: After forming a joint venture, neither firm in the joint venture
can make decisions on its own. Rainbow Limited may have to discuss with the
Mainland company and get its consent before making any decision. (2 marks)

2.39 a The reasons are:

 Miss Lo can obtain support from the franchisor in terms of marketing, supplies,
accounting and management.
 The dry-clean laundry chain has built up goodwill. It is well-known and accepted
by customers.
 Miss Lo can also enjoy the benefits of a large shop such as lower costs when
buying cleaning products in bulk. This greatly reduces the cost of goods.
 The dry-clean laundry chain might have the machinery to clean special products
(such as down and leather products) and provide delivery services for customers.
Miss Lo can provide these services for customers at a lower cost.
 The management system of the dry-clean laundry chain might help establish
goodwill quickly.
(Any three of the above, 2 marks for each point)

b The differences are:

 Miss Lo will lose her autonomy in managing her shop. Miss Lo has to operate the
business according to the dry-clean laundry chain’s instruction, in areas such as
display and service pricing.
 Miss Lo does not need to report to anyone when she operates her shop as a sole
proprietorship. After joining the franchise, the operation of her laundry will be

NSS BAFS: Business Environment and Introduction to 20 © Pearson Education Asia Limited 2014
Management 2nd Edition: Answers to Textbook Exercises
 monitored regularly by the dry-clean laundry chain.
 Miss Lo can set up a unique image of her dry-clean laundry shop as a sole
proprietorship. After joining the franchise, her shop’s look, staff uniforms, logos,
and prices are all standardised according to the dry-clean laundry chain’s
requirements.
(Any two of the above, 2 marks for each point)
2.40 a Government departments operate differently from private enterprises as follows:
 Government departments are run by the government. The government participates
in the daily running of their businesses. Private enterprises are run by private
individuals. (2 marks)
 Government departments do not operate on a commercial basis. Most private
enterprises operate on a commercial basis because their main objective is to make a
profit. (2 marks)
 Government departments are mostly inefficient in their operation because of the
lack of direct competition and their complicated and slow decision-making
processes. Private enterprises have a great incentive to operate efficiently. Most are
quick to make decisions in response to the market. (2 marks)
b Given that private enterprises are more efficient than government departments,
outsourcing can increase their operational efficiency. This enables the government to
provide services to the general public more cost effectively. (2 marks)
Private enterprises might provide better services to the general public. If they do not
provide quality services, the government can hire other companies to provide the
services. They will lose the business. (2 marks)
Past Exam Questions
2.45 D
2.47

NSS BAFS: Business Environment and Introduction to 21 © Pearson Education Asia Limited 2014
Management 2nd Edition: Answers to Textbook Exercises
NSS BAFS: Business Environment and Introduction to 22 © Pearson Education Asia Limited 2014
Management 2nd Edition: Answers to Textbook Exercises